Shipping: Holed beneath the waterline
Shipping: Holed beneath the waterline
The staggering and sudden decline in the cost of chartering a cargo ship reflects both the global economic slowdown and the ongoing credit crunch. Sarah Arnott reportsThursday, 6 November 2008 Hold on to your hat: the Baltic Dry Index was down at 826 points yesterday, a shattering drop from its high of 11,793 in May.The index, which tracks the price of shipping bulk cargo, might not sound like a reason to choke on your cornflakes. But it is an unparalleled, ifsubtle, barometer of the global trade in economic building blocks like iron ore, coal and grain – and it is telling a worrying tale.Put simply, the cost of shipping has dropped through the floor. Sending a tonne of iron ore from Brazil to China in early June would have set you back more than $100 (£62) per tonne, or around $15m per voyage. But freight rates have now dropped to only slightly over $10 per tonne, or just $1.5m for the 70-90 day journey.As if that wasn’t dramatic enough, the drop in daily charter rates is even sharper. At the peak of the market, a 170,000-tonne Cape size bulk carrier was hired out at the eye-watering daily rate of $234,000. At the beginning of this week, it was $5,611 – a fall of nearly 98 per cent.Peter Kerr-Dineen, chairman of Howe Robinson shipbrokers, said: "The scale of change in rate is utterly staggering – the market has come down from super-boom territory to pretty close to bust, effectively in two months."Contracting demand for imports in recession-wary economies across the world is a factor, as are steadily falling commodity prices and the mechanics of supply and demand in the shipping industry itself. But the real trouble is less obvious, largely unprecedented, and potentially devastating. The wheels of international shipping are greased with "letters of credit" issued to buyers of bulk cargo by their banks. These guarantee the value of the shipment once it is in transit but before it is delivered. The problem is that the credit crunch, with the resulting liquidity problems in the international banking sector, is taking its toll on the availability of these entirely routine instruments. "We have the hugely worrying and unprecedented development where there are perfectly creditworthy shippers and receivers unable to open perfectly standard letters of credit," Mr Kerr-Dineen said. Cargos are sitting on docksides because the finance is not available to ship them, with the gravest implications for the future. "This is a nuclear bomb in the freight market, and in world trade," Mr Kerr-Dineen said. "Liquidity has to return because if there is insufficient money to provide standard finance, world trade will be sharply cut back and economic growth will implode." This comes at the worst possible time, on top of a string of other adjustments already affecting the shipping market. After an unparalleled boom over the last five years – fuelled in large part by rocketing Chinese demand – it was to be expected that the overheated market would cool. And in the shipping industry itself, the number of vessels started to catch up with demand. Meanwhile ballooning commodity prices were being undercut as additional supply, fuelled by the high prices, started to come on stream.Against such a background, more recent concerns over the economic slowdown in both the East and the West have pushed users of commodities to run down their existing stocks, rather than buy in new supplies at what are still relatively inflated prices.These are all to some extent predictable economic adjustments, but a more sinister effect has been that de-stocking is masking the shortages caused by the dearth of credit. Mr Kerr-Dineen says there are around three months left before stocks run out."If the problem is not resolved, there will be no way in which even the sharply revised economic growth forecasts for 2009 will be met, because without normal trade economies cannot function. Ultimately, flour mills will run out of wheat and power stations will run out of coal," he said.So far, the most significant problems have been confined to the bulk commodities trade. Manufactured goods have been are less affected because there is less reliance on letters of credit, said a source in a large container shipping company. Large shippers like Walmart or Nike do not need the letters because they are, in effect, sending to themselves. And even where trade is between companies, long-standing commercial relationships leave a lot more to trust than in the more volatile commodities market.But firms using containers to ship bulk products such as bananas, meat or fish are feeling the pinch. "We are certainly seeing unusual delays in issuance of letters of credit for commodity trades," the source said. Banks are charging more to issue the letters, and nervous traders are requiring guarantees, where historically trust might have been enough.Jeremy Penn, chief executive of the Baltic Exchange which runs the Baltic Dry Index, said: "Sentiment is also a key driver and has gone completely into reverse. People are also waiting for prices to fall further. There is no incentive to do today what they think will be cheaper tomorrow." George Cambanis, head of global shipping at Deloitte, said: "Everybody can still hold their breath for the time being, but it is anybody’s guess how long it will take for money to start circulating again."He added: "Trading has virtually come to a standstill, because there is no cargo for the ships. There has also been no trading of vessels in the last few weeks, so there is no market value out there for companies’ capital investment in their ships." No longer oiling the wheelsFreight cargo is not the only piece of the global economic infrastructure being hit by the on-going constriction of credit. Companies looking for forward hedging are also struggling to find banks willing to put up the cash. Earlier this week, Michael O’Leary, the chief executive of Ryanair, admitted that his plans to hedge 2009’s fuel requirements went awry because banks were not willing or able to take the risk. "We were originally planning to hedge about 50 per cent of our needs for the next 12 months but we just couldn’t get there," he said. "Banks in hedging are withdrawing and fuel companies don’t trust the banks as counter party risk."The budget carrier was stung by soaring oil prices that reached $147 per barrel in July and more than doubled the airline’s fuel bill, from €393m (£318m) to €789m (£638m) in the first six months of the year.
I first saw this a month ago. Yet, there appears to have not been any palpable effects from this. Is it true? Or does it take more than a month for the effects to be felt?
If this is correct, we are in deep do dos….